21-D-0034 April 7, 2021 Japan Credit Rating Agency, Ltd. (JCR) announces the following credit rating.
The Nanto Bank, Ltd. (security code: 8367)
Rationale (1) The Nanto Bank, Ltd. (the "Bank") is a regional bank that mainly operates in Nara Prefecture with a fund volume of approximately 5.3 trillion yen. It has overwhelmingly large market shares for both deposits and loans in the prefecture and is also increasing the loan balance in Osaka by focusing on the strengthening of its sales in that region. The rating on the Bank reflects its strong operating base and relatively good capital adequacy. The Bank's profitability, which was previously low, is improving to a level comparable to its rating. JCR believes that the Bank can maintain a recovery trend in the core net business income (excluding gains (losses) on cancellation of investment trusts) through cost reduction and other measures. (2) The core net business income has been on a downward trend since the fiscal year ended March 2018 (FY2017), but in the third quarter of FY2020, it increased by around 40% year-on-year, and ROA (on a core net business income basis), which had fallen to the 0.1% range level, improved to around 0.25%. While interest and dividends on securities declined due partly to the redemption of yen-denominated bonds, factors including a significant increase in interest on loans from the COVID-19 pandemic related loans to businesses, a decrease in foreign currency financing costs, and a decline in personnel expenses contributed to the increase in the core net business income. The effect of the increase in revenue from the COVID-19 pandemic related loans will extend into FY2021, and the Bank is expected to continue to reduce expenses, partly because of a fundamental review of its branch operations. In addition to this, JCR is paying attention to whether the Bank can raise its profit level through continued growth in loans to SMEs, expansion of fee income, etc. (3) The non-performing loans ratio under the Financial Reconstruction Act is around 1.5%, slightly below the average for regional banks. The Bank is conservative in its loan loss provision, such as its application of a method of provision for the remaining amount after deducting the recoverable portion through the reasonably estimated future cash flows for large debtors. Although the credit costs temporarily increased in FY2019 due to the downgrading of debtors in relation to the Bank's business revitalization efforts, the costs remained at below 30% of the core net business income in the third quarter of FY2020, despite the COVID-19 pandemic impact. However, the balance of loans classified as assets requiring caution is increasing, and the economic outlook is uncertain, so the trend in credit costs requires attention. (4) In the securities investment, the Bank is strengthening its investment in investment trusts in order to secure profits. The amount of interest rate risk associated with bond holdings is not small when investment trusts are included, but it is not excessive in relation to capital. On the other hand, the amount of price fluctuation risk associated with holdings of stock and the like, including investment trusts, is large relative to capital. It is necessary to continue to pay attention to the balance between risk and return in securities investment. (5) The Bank's adjusted consolidated core capital ratio, which excludes general allowance for loan losses and other items, was over 9% as of September 30, 2020, a level appropriate for an "A" rated regional bank. Although an increase in risk assets due to diversification of securities investments and other factors is expected to put downward pressure on the consolidated core capital ratio, JCR believes that the Bank will maintain a capital level commensurate with its rating as it accumulates retained earnings in light of its improved earnings capacity. Kengo Sakaguchi, Kota Matsuzawa
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https://www.jcr.co.jp/en/
Rating Issuer: The Nanto Bank, Ltd.
Japan Credit Rating Agency, Ltd. Jiji Press Building, 5-15-8 Ginza, Chuo-ku, Tokyo 104-0061, Japan Tel. +81 3 3544 7013, Fax. +81 3 3544 7026 Information herein has been obtained by JCR from the issuers and other sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error as well as other factors, JCR makes no representation or warranty, express or implied, as to accuracy, results, adequacy, timeliness, completeness or merchantability, or fitness for any particular purpose, with respect to any such information, and is not responsible for any errors or omissions, or for results obtained from the use of such information. Under no circumstances will JCR be liable for any special, indirect, incidental or consequential damages of any kind caused by the use of any such information, including but not limited to, lost opportunity or lost money, whether in contract, tort, strict liability or otherwise, and whether such damages are foreseeable or unforeseeable. JCR's ratings and credit assessments are statements of JCR's current and comprehensive opinion regarding redemption possibility, etc. of financial obligations assumed by the issuers or financial products, and not statements of opinion regarding any risk other than credit risk, such as market liquidity risk or price fluctuation risk. JCR's ratings and credit assessments are statements of opinion, and not statements of fact as to credit risk decisions or recommendations regarding decisions to purchase, sell or hold any securities such as individual bonds or commercial paper. The ratings and credit assessments may be changed, suspended or withdrawn as a result of changes in or unavailability of information as well as other factors. JCR receives a rating fee paid by issuers for conducting rating services in principle. JCR retains all rights pertaining to this document, including JCR's rating data. Any reproduction, adaptation, alteration, etc. of this document, including such rating data, is prohibited, whether or not wholly or partly, without prior consent of JCR. JCR is registered as a "Nationally Recognized Statistical Rating Organization" with the U.S. Securities and Exchange Commission with respect to the following four classes. (1) Financial institutions, brokers and dealers, (2) Insurance Companies, (3) Corporate Issuers, (4) Issuers of government securities, municipal securities and foreign government securities. JCR publishes its press releases regarding the rating actions both in Japanese and in English on the same day. In case that it takes time to translate rating rationale, JCR may publicize the summary version, which will be replaced by the full translated version within three business days. (Regarding Structured Finance products, JCR only publicize the summary version in English.)
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I n f o rm ati o n D i sclo su re F o rm Japan Credit Rating Agency, Ltd.
Disclosure Required by Paragraph (a)(1)(ii) of Rule 17g-7
Issuer: The Nanto Bank, Ltd
Rating Publication Date: April 7, 2021
The Symbol, Number, or Score in the Rating Scale used to Denote Credit Rating Categories and 1 Notches and, the Identity of the Obligor or the Identity and a Description of the Security or Money Market Instrument as Required by Paragraph (a)(1)(ii)(A) of Rule 17g-7
Please see the news release. If the credit rating is a private rating, please see the report for private rating.
2 The version of the procedure or methodology used to determine the credit rating; as Required by Paragraph (a)(1)(ii)(B) of Rule 17g-7
Please see the news release. If the credit rating is a private rating, please see the report for private rating.
3 The Main Assumptions and Principles used in Constructing the Procedures and Methodologies used to Determine the Credit Rating as Required by Paragraph (a)(1)(ii)(C) of Rule 17g-7
The credit rating methodology assumes, in principle, to be applied to assess the likelihood of a given debt payment in light of its issuer’s condition and business environment, etc. in the relevant future. There is certain limitation, however, in the time horizon that the rating foresees. The credit rating methodology assumes, in principle, that the factors posted in the below are particularly important for such likelihood to be determined, and that the rating determination is made by evaluating each of them not only quantitatively but also employing qualitative analyses. A) Business Bases The likelihood of a given debt payment is highly conditional to its issuer’s business bases - how they can be maintained/ expanded into the future and thereby secure earnings and cash flows in adequacy and in a sustainable way. B) Financial Grounds and Asset Quality The likelihood of debt payment is highly dependent on the degree of the issuer’s indebtedness and loss absorption capacity in terms of equity capital. Also notable is that a financial institution might see a significant loss of financial grounds as a result of changes in value of the assets under its possession. C) Liquidity Positions The likelihood of debt payment is highly dependent on the adequacy of the issuer’s cash and other sources of repayment (liquidity positions).
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D) Related Parties’ Status and Stance of Support/ Assistance for the Issuer The likelihood of debt payment is affected one way or the other by the issuer’s related parties such as parent company, subsidiary, guarantor, and the government of the issuer’s business domicile, etc. - by their own conditions and/ or position of support/ assistance for the issuer. E) Order of Seniority in Debt Payment The likelihood of debt payment can be different between given debts of the same issuer. The likelihood of debt payment for an individual debt is dependent on the issuer’s discretion, and/ or its rank relative to other debts of the same issuer in the order of seniority in principal/ interest payment which is determined by design as financial product or by laws, etc.
4 The Potential Limitations of the Credit Rating as Required by Paragraph (a)(1)(ii)(D) of Rule 17g-7
The credit rating herewith presented by JCR is its summary opinion with regard to the likelihood of given debt payment and hence not necessarily a perfect representation of such likelihood. The credit rating is not intended to estimate the probability of default or the loss on given default, either. The objective of the credit rating herewith presented does not include any concerns other than the likelihood of debt payment, such as risks of price changes, market liquidity, etc. The credit rating herewith presented is necessary to be reviewed along with possible changes of the issuer of rated objects in its business performance and/ or circumstances which include regulatory environment, and hence subject to possible alteration.
5 Information on the Uncertainty of the Credit Rating as Required by Paragraph (a)(1)(ii)(E) of Rule 17g-7
The information used for the determination of credit rating as herewith presented is obtained by JCR from the issuer of rated objects and other sources that JCR trusts in terms of accuracy and reliability but possibly contains errors due to human, non-human or other causes. Consequently, the credit rating determined on the grounds of such information does not constitute, explicitly or implicitly, any representation or warrant of JCR on the information itself or any consequences of its use in terms of accuracy, relevance, timeliness, wholeness, market value, or usefulness for any specific purposes.
6 Use of Due Diligence Services of a Third Party in Taking the Rating Action as Required by Paragraph (a)(1)(ii)(F) of Rule 17g-7
There is no use of any third-party due diligence service in the determination of the credit rating herewith presented.
7 Use of Servicer or Remittance Reports to Conduct Surveillance of the Credit Rating Required by Paragraph (a)(1)(ii)(G) of Rule 17g-7
There is no use of any servicer or remittance report to conduct surveillance of the credit rating herewith presented.
8 The Types of Data Relied Upon for the Purpose of Determining the Credit Rating as Required by Paragraph (a)(1)(ii)(H) of Rule17g-7
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The information posted in the below, which includes data, is used for the determination of the credit rating herewith presented. A) Audited financial statements presented by the rating stakeholders B) Explanations of business performance, management plans, etc. presented by the rating stakeholders
9 Overall assessment of the Quality of Information Available and Considered in Determining the Credit Rating as Required by Paragraph (a)(1)(ii)(l) of Rule 17g-7
JCR holds its basic policies for securing the quality of information as a base of due diligence for the determination of credit ratings. The information used as a base for the determination of credit rating herewith presented satisfies such policies, which include the audit by an independent auditor, the warranty made by the issuer, the publication by the issuer, some independent media or, otherwise, JCR analyst’s scrutiny, etc. JCR sees no particular weakness in the quality of information used for the determination of the credit rating herewith presented as compared to the information used in other cases of the credit rating for comparable issuers or ratable objects. If the credit rating is an Indication, please see the report for Indication.
10 Information Relating to Conflicts of Interest as Required by Paragraph (a)(1)(ii)(J) of Rule 17g-7
JCR receives payment of compensation for the determination of the credit rating herewith presented from either one of those parties who are issuer, underwriter, depositor or sponsor. JCR did not receive in the last fiscal year in the past payment of compensation from the same party for any kind of JCR’s service other than the determination of credit rating, such as one in the ancillary business.
11 Explanation or Measure of the Potential Volatility of the Credit Rating as Required by Paragraph (a)(1)(ii)(K) of Rule 17g-7
A) Business Bases The credit rating is subject to alteration if there is improvement or deterioration of the issuer’s business bases, since its revenue, etc. may improve or deteriorate by the change in its business management policies, clients’ preferences, competitive situation, or a technological innovation. The resultant alteration of the credit rating is usually by a notch, with possibility of a few notches if and when the change in the business bases is large. B) Financial Grounds and Asset Quality The credit rating is subject to alteration if the issuer increases/ decreases its debt/ capital or vice versa and thereby makes its individual debt payment liability less or more bearable and its loss absorption capacity into the future decreased or increased. Also, the changes in the quality of asset under the issuer’s holding may affect the credit rating, since such changes could raise or lower the likelihood of future loss of the issuer’s financial grounds. The resultant alteration of the credit rating is usually by a notch, with possibility of a few notches if and when the change in the financial grounds and/ or asset quality is large. C) Liquidity Positions The credit rating is subject to alteration if there is a change in the issuer’s financial management policy or in the relations with fund procurement sources and the change thereby makes its liquidity positions improve or deteriorate. The resultant alteration of the credit rating is usually by a notch, with possibility of a few notches if and when the change is large.
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D) Related Parties’ Status and Stance of Support/ Assistance for the Issuer The credit rating is subject to alteration if there is a change in the issuer’s parent company or subsidiary, guarantor or other provider of credit enhancement, or the government of the issuer’s business domicile, or other related parties’ own conditions and/ or position of support/ assistance for the issuer, and the change thereby makes its business bases, financial grounds and/ or liquidity positions improve or deteriorate, and/ or making the effectiveness of guarantee and other credit enhancement improve or deteriorate. The resultant alteration of the credit rating is usually a notch, with possibility of a few notches if and when the change is large. E) Order of Seniority in Debt Payment and Non-Payment Forgiven by Contract The credit rating is subject to alteration if there is a change in the rated debt’s status in the order of seniority relative to other debts caused by the improvement/ deterioration of the issuer’s financial condition. The resultant alteration of the credit rating is usually a notch, with possibility of a few notches if and when the change is large. Also, in case of the financial products for which non-payment of interest/ principal is contractually permissible, the credit rating is subject to alteration if and when the likelihood of such non-payment is projected to increase or decrease. The resultant alteration of the credit rating could be by a notch but often as much as a few notches. F) Rise and Fall in General Economy and Markets The credit rating is subject to alteration if there is a rise/ fall in the general economy and/ or the markets inducing the issuer’s revenues/ expenses to increase/ decrease and vice versa, etc. The resultant alteration of the credit rating is usually by a notch, with possibility of a few notches if and when the change is exceptionally large. G) Various Events The credit rating is subject to alteration on occurrence of various events, such as change in the issuer’s major shareholders, M&A and other organizational change, accident, violation of the law, litigation, legal/ regulatory change, natural disaster, etc., which are unforeseeable at the time when the credit rating is determined, causing a significant change on the issuer’s business bases, financial grounds, etc. The resultant alteration of the credit rating could be by a notch but more often than not as much as a few notches.
Information on the Content of the Credit Rating, Including the Historical Performance of the Credit 12 Rating and the Expected Probability of Default and the Expected Loss in the Event of Default as Required by Paragraph (a)(1)(ii)(L) of Rule 17g-7
Historical records of the credit rating herewith presented are posted in the end of this paper. The credit rating herewith presented by JCR is its summary opinion with regard to the likelihood of given debt payment and hence not necessarily a perfect representation of such likelihood. The credit rating is not intended to estimate the probability of default or the loss on given default, either. Facts of the probability of default are posted as Form NRSRO Exhibit 1 on the JCR website under the URL: https://www.jcr.co.jp/en/service/company/regu/nrsro/
13 Information on the Sensitivity of the Credit Rating to Assumptions Made as Required by Paragraph (a)(1)(ii)(M) of Rule 17g-7
A) Business Bases The credit rating herewith presented could be changed if and when the assumptions made at the time of its determination turn out to be inaccurate with regard to the issuer’s business bases and powers of earning or cash flow generation, etc. The resultant change of the credit rating is most likely by a notch, as JCR speculates, but possibly as much as a few notches if the development is rapid in improvement or deterioration of the issuer’s business bases on some drastic change in the operational environments, etc. B) Financial Grounds and Asset Quality The credit rating herewith presented could be changed if and when the assumptions made at the time of its determination turn out to be inaccurate with regard to the issuer’s financial grounds and asset
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quality. The resultant change of the credit rating is most likely by a notch, as JCR speculates, but possibly as much as a few notches if the development is rapid in improvement or deterioration of the issuer’s financial grounds and/ or asset quality on some drastic change in its business bases. C) Liquidity Risks The credit rating herewith presented could be changed if and when the assumptions made at the time of its determination turn out to be inaccurate with regard to the issuer’s liquidity positions. The resultant change of the credit rating is most likely by a notch, as JCR speculates, but possibly as much as a few notches if the development is rapid in improvement or deterioration of the issuer’s liquidity positions on some drastic change in its financial management policy or relations with fund procurement sources, etc. D) Related Parties’ Status and Stance of Support/ Assistance for the Issuer The credit rating herewith presented could be changed if and when the assumptions made at the time of its determination turn out to be inaccurate with regard to the issuer’s parent company or subsidiaries, guarantor or other providers of credit enhancement, the government of the issuer’s business domicile or other related parties’ status and stance of support/ assistance for the issuer. The resultant change of the credit rating is most likely by a notch, as JCR speculates, but possibly as much as a few notches if there is a major change on the part of related parties, such as replacement, disappearance, some drastic improvement/ deterioration of financial grounds/ balances, etc. E) Rise and Fall in General Economy and Markets The credit rating herewith presented could be changed if and when the assumptions made at the time of its determination turn out to be inaccurate with regard to the prospects of general economy and markets. JCR expects the change should be most likely by a notch but could be as much as a few notches, should the economy or the markets change so greatly.
14 Information on the Representations, Warranties, and Enforcement Mechanisms of an Asset- backed Security as Required by Paragraph (a)(1)(ii)(N) of rule 17g-7
The credit rating herewith presented is not for an ABS product, and hence no relevant issue.
Japan Credit Rating Agency, Ltd. Jiji Press Building, 5-15-8 Ginza, Chuo-ku, Tokyo 104-0061, Japan Tel. +81 3 3544 7013, Fax. +81 3 3544 7026
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The Historical Performance of the Credit Rating
Issuer Name Issue Name Publication Date Rating Outlook/Direction The Nanto Bank, Ltd. Issuer(Long-term) April 7, 2000 A+ The Nanto Bank, Ltd. Issuer(Long-term) March 21, 2001 A+ The Nanto Bank, Ltd. Issuer(Long-term) December 9, 2002 A The Nanto Bank, Ltd. Issuer(Long-term) December 10, 2004 A The Nanto Bank, Ltd. Issuer(Long-term) March 14, 2006 A Stable The Nanto Bank, Ltd. Issuer(Long-term) March 9, 2007 A Stable The Nanto Bank, Ltd. Issuer(Long-term) March 28, 2008 A Stable The Nanto Bank, Ltd. Issuer(Long-term) April 22, 2009 A Negative The Nanto Bank, Ltd. Issuer(Long-term) February 15, 2010 A Stable The Nanto Bank, Ltd. Issuer(Long-term) March 18, 2011 A Stable The Nanto Bank, Ltd. Issuer(Long-term) April 2, 2012 A Stable The Nanto Bank, Ltd. Issuer(Long-term) March 18, 2013 A Stable The Nanto Bank, Ltd. Issuer(Long-term) April 23, 2014 A Stable The Nanto Bank, Ltd. Issuer(Long-term) March 13, 2015 A Stable The Nanto Bank, Ltd. Issuer(Long-term) April 28, 2016 A Stable The Nanto Bank, Ltd. Issuer(Long-term) March 23, 2017 A Stable The Nanto Bank, Ltd. Issuer(Long-term) April 11, 2018 A Stable The Nanto Bank, Ltd. Issuer(Long-term) March 26, 2019 A Stable The Nanto Bank, Ltd. Issuer(Long-term) March 26, 2020 A Stable
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Attestation Required by Paragraph (a)(1)(iii) of Rule 17g-7
I, Shozo Matsumura, have responsibility to this Rating Action and to the best of my knowledge:
A) No part of the credit rating was influenced by any other business activities.
B) The credit rating was based solely upon the merits of the obligor, security, or money market instrument being rated.
C) The credit rating was an independent evaluation of the credit risk of the obligor, security, or money market instrument.
Shozo Matsumura General Manager of Financial Institution Rating Department
Japan Credit Rating Agency, Ltd. Jiji Press Building, 5-15-8 Ginza, Chuo-ku, Tokyo 104-0061, Japan Tel. +81 3 3544 7013, Fax. +81 3 3544 7026